Describe the competition in the overnight package delivery industry and the strategies by which these two firms are meeting the competition.
FedEx:
Innovation
Broke into air freight market through purchase of own fleet of planes
Competitors typically used space available on commercial flights
Implemented hub-and-spoke distribution pattern (key innovation)
Operational leader (Malcolm Baldridge National Quality Award)
“Absolutely, Positively Overnight”
Company philosophy – People-Service-Profit
Emphasis on customer service
Total quality management
Employee participation
Reputation as good place to work, helped keep out unions
High capital investment to expand operations and services
Technological innovation – Greater monitoring and control of customer ordering, package tracking and process
UPS
Dominant firm in industry until entry by FedEx
Expanded capabilities to be able to deliver to any address in the world
Emphasis on efficiency – route monitoring and control
Went public in 1982 to raise capital to compete in the overnight delivery market
Large scale acquisitions of planes, trucks to expand capabiltiies
Expanded through acquisition
Purchased freight carrier to expand into Latin America
Purchased MBE to expand into retail packaging/shipping/mail services market
High emphasis on being low cost provider
Invested in IT, aircraft and facilities to support innovations, maintain quality and reduce costs
What are the enabling and inhibiting factors facing the two firms as they pursue their goals?
Enabling Factors:
FedEx:
Deregulation – Enabled FedEx to enter market
Size – Large enough to take advantage of economies of scale
Innovation – Hub & Spoke, maintaining own plane fleet
Technology – Tracking, monitoring
Operations – “Absolutely Positively Overnight”, Awards
Employees – Non-union, employees involved in process
Large portion of costs are fixed, so increases in revenue go directly to bottom line
UPS:
Size – Dominant firm in express package industry, economies of scale, existing worldwide presence
Technology – Leader in logistics, route management
Finance – AAA credit rating, ability to raise large amount of capital quickly
Efficiency – Low cost leader, ability to compete on price
Inhibiting Factors:
FedEx:
Financial – BBB credit rating, lower ability to raise capital
Market – Domestic market reached maturity, must expand overseas
Market – Unable to compete in Europe
Concentration – Primarily competes in air shipment/overnight market segment
Lack of skilled workforce in China
Overall Chinese business environment (Exh 11)
UPS:
Deregulation – Opened market to competitors
Complacency – Older, established company, used to controlling market
Employees – Unionized
Size – Slower to respond, shift focus
Lack of skilled workforce in China
Overall Chinese business environment (Exh 11)
Do you think either firm can attain sustainable competitive advantage in this business?
Yes, UPS is the more likely of the two to attain a sustainable competitive advantage:
Financial strength – Ability to raise capital at lower costs
Largest firm in delivery market
Worldwide presence
Low cost leader- better ability to compete on price
More complete service offering
Why did FedEx’s stock price outstrip UPS’s during the initiation of talks over liberalized air cargo routes between the U.S. and China?
Stock price is a forward looking measure – Many valuation models base stock prices on discounted future cash flows – Estimates of growth, applied to current cash flows, discounted to present
Market viewed the liberalization of air cargo routes in China as more favorable to FedEx than to UPS.
FedEx already had largest foreign presence in China
Twice as many flights to China – 11 flights vs 6
Served more cities within China than UPS
UPS predicted demand would outstrip its capacity
Assuming a perfectly efficient stock, how might one interpret a 14% increase in FedEx’s market value of equity?
A 14% increase in FedEx’s market value of equity can be
